Magazine

What’s Goal-Based Investing, Anyway?

By Sallie Krawcheck

March 9, 2018

Ask the question about whether your investments are on track to achieving your goals, and the answers from some traditional providers get pretty fuzzy pretty fast. You’ll probably hear whether your mutual fund has out- or under-performed the S&P 500. Or what quintile of performance it’s in. Or what its tracking error is.

At Ellevest, we’re all about getting you to your goals…because in our view, that’s all that matters. (Although, believe me, our decades in the investing industry mean that we can talk the jargon with the best of them.) So with us, you’ll hear the term “goals-based investing.”

We’re all about getting you to your goals, because that’s what really matters.

The name is pretty clunky, but it means what it says: Our investment objective is to help you reach your goals. Period. That’s very different from trying to outperform some market index. In that construct, it’s possible that we can be wildly successful in beating the market, but you as a client might not be able to start your business, or buy a new home. That doesn’t work very well for you, does it?

We believe that goals-based investing gives you a much higher chance of reaching your goals.

Even the simple act of writing down your goals and sharing them with others increases your chances of achieving them. Actually investing for them? And “Ellevesting” for them? Now you’re talking.

How do we do “goals-based investing?”

First, we gather information about you and your finances, your age, career, and what you want to accomplish. We then create your financial plan, with recommended savings and goal-specific investment portfolios, tailored to you and wholly designed to help you reach those goals.

From there, we create a customized investment portfolio for each of your goals. And each portfolio can differ from the others, based on the type of goal you want to achieve. For example, a retirement savings portfolio will be very different from a more near-term “Big Splurge” goal. That’s in part because a longer-term goal enables you to take on greater risk — and offers the opportunity to achieve a higher return — since the time frame is longer.

How do we forecast the performance of the investment portfolios?

Well, we can’t predict the future, and past performance does not guarantee future return, but we can analyze the past as a good starting point. Our forward-looking forecasts combine historical asset class performance and current economic conditions, and employ the expertise of Morningstar and our Chief Investment Officer Sylvia Kwan, to determine the range of possible outcomes for your portfolios.

What’s in the Ellevest portfolios?

At Ellevest, we primarily invest in passive exchange-traded funds (ETFs). These investment types are designed to provide broad market exposure while keeping costs low. We use ETFs that invest in both US and international stocks and bonds, and create curated combinations of these investments for each of your goals.

You also let us know whether you prefer our core portfolios, made up solely of passive ETFs, or our Ellevest Impact Portfolios, which are a mix of passive ETFs and some mutual funds designed for impact. Then we determine what mix of funds can best help you meet your goals.

What is the probability of reaching a goal?

We target getting to your goal—or better—in 70% of market scenarios. To get there, we forecast hundreds of realistic economic scenarios, such as strong global markets, high inflation, economic recessions, and so on. We then construct a portfolio recommendation, and tell you the deposits you need to make, so that in 70% of those scenarios, you will reach the dollar amount of the goal you are targeting, or more. (This is higher than what we’ve seen at some other firms.)

And it’s not all-or-nothing. In 30% of the scenarios, you may just fall short of your target, not miss it completely. For many folks, this outcome can be fine — it may just mean starting their own business a bit later.